AscottREIT – UOBKH
A Pedigree Pan-Asian Hospitality Play
Stable earnings underpinned by diversified asset portfolio. Ascott Residence Trust (ART) owns 37 properties, with 3,550 serviced residence/rental housing units, spread across 11 cities and seven Asia-Pacific countries. Its diversified regional exposure in both emerging and mature markets ensures stable earnings. Compared with hotels, the relatively longer-term leases of ART’s portfolio cushion it against short-term economic shocks. Excluding Revenue Per Available Unit (RevPAU) growth, we expect ART’s existing asset portfolio to offer a floor DPU yield of 5.9% and 6.1% in 2008 and 2009 respectively.
Potential S$300m asset acquisitions in 2008. ART’s ability to execute acquisitions can be seen from the over S$500m worth of acquisitions it has made since Mar 06. With a low gearing of 33.1%, ART can fund yield-accretive acquisitions of up to S$300m through debt (assuming debt/asset ratio of 45.0%) without having to tap the equity market. With RevPAU growth and S$300m worth of asset acquisitions, ART’s DPU yield will improve to 6.5% and 7.4% in 2008 and 2009 respectively .
Pedigree enhanced by CapitaLand’s TAG privatisation. ART has the right of first refusal to its sponsor The Ascott Group’s (TAG) serviced residence/rental housing assets in Asia-Pacific. TAG is the largest serviced residence owner-operator outside of the US. Its extensive exposure in Asia-Pacific provides a potential pipeline for asset injections into ART. The privatisation of TAG by its parent, CapitaLand, will increase the latter’s effective stake in ART from 37.3% to 46.6%. This streamlining of CapitaLand’s hospitality segment will strengthen ART’s importance in the Group and thus boost its potential for value creation for CapitaLand.
Initiate coverage with BUY and target price of S$1.77. Our target price of S$1.77 is on a par with our DCF valuation per share (WACC: 6.9%; terminal growth rate: 2.0%). ART is trading at a 27.7% discount to our target price and a 20.0% discount to ART’s 2007 NAV of S$1.60/share. Our earnings forecasts have not factored in other acquisitions besides the S$300m assumed for 2008. Risks include a sharp economic downturn in Asia, an inability to raise cheap debt, prolonged downturn in equity markets and competition in asset acquisitions.
PLife – BT
Parkway Life Reit agrees to buy property in Japan
It will acquire a distributing facility in Matsudo city for 2.59b yen
PARKWAY Life Reit will soon add an overseas property to its portfolio, following an agreement to buy a distributing facility in Japan for 2.59 billion yen (S$35 million).
The Reit’s manager, Parkway Trust Management, yesterday said Parkway Life Reit has agreed to acquire a two-storey building named J-REP Matsudo II with a net lettable area of about 3,240 square metres.
The freehold property, in Chiba prefecture’s Matsudo city, offers an initial net yield of 5.3 per cent. Parkway Trust said there is potential to increase the net lettable area as the current ratio of the building’s floor-to-land area is only 40 per cent, while the allowable ratio is 200 per cent.
Completed in 2005, the building is currently leased by logistics firm Nippon Express Co, which has an A2 credit rating. Nippon, in turn, has a back-to-back lease with its partner Inverness Medical Japan Co. Inverness uses the property to manufacture, sell and distribute its diagnostic test kits and medical devices.
‘We are very excited about Parkway Life Reit’s first investment in Japan,’ said Parkway Trust Management CEO Justine Wingrove. ‘This is a key market for us as the demand for good quality healthcare real estate assets is expected to grow, driven by the fact that by the year 2050, it is predicted that one in three Japanese will be over 65 years of age.’
The master tenancy agreement with Nippon will expire in nine years’ time. The property was valued by Colliers Halifax to be worth about 2.619 billion yen, as at last month.
Parkway Life is making the investment through its wholly owned subsidiary Matsudo Investment Pte Ltd. The seller of the property is J-REP Co, whose majority shareholder is Macquarie Goodman Asia.
The investment, to be funded through debt, will increase Parkway Life’s gearing to 8 per cent, from 4 per cent. With its ‘BBB+’ credit rating, the Reit can have about $1.2 billion worth of additional debt capacity.
Parkway Life did not reveal how much the investment will add to its distribution per unit (DPU), only saying it is ‘yield-accretive’.
Between last August, when it was listed, and end-December, Parkway Life posted a distributable income of $13.64 million, leading to a DPU of 2.27 cents.
Shares of Parkway Life ended two cents down at $1.19 yesterday.
PLife – UOBKH
Acquiring pharmaceutical distributing facility in Japan
Taking a small bite in Japan. Parkway Life REIT has executed an agreement to acquire a pharmaceutical production and distribution facility in Japan for total cash consideration of ¥2.59b or S$35m. The two-storey freehold building is located in Matsudo City, Chiba prefecture with net lettable area of 34,875sf. Nippon Express has a master lease at the premise with unexpired lease term of nine years. The building is currently occupied by Inverness Medical Japan, which is involved in drug development, manufacturing, export and sales. Nippon Express provides logistics and distribution support and has a back-to-back lease with Inverness Medical Japan. Inverness Medical Japan utilises the facility to manufacture, sell and distribute medical test kit devices.
Potential to redevelop the site. The acquisition provides initial net yield of 5.3%. The ratio of the building’s floor area to the land area is about 40% compared to allowable ratio of 200 % based on current zoning regulation. There is therefore potential to redevelop the site to maximise returns. The acquisition will be funded by debt, which increases gearing from 4% to 8%.
We like Parkway Life REIT for its healthcare focus and strong defensive qualities. It benefits from revenue growth at Mount Elizabeth Hospital, Gleneagles Hospital and East Shore Hospital as variable rent is 3.8% of adjusted hospital revenue. Our target price is S$1.82 based on the discounted dividend model (required rate of return: 6.75%; terminal growth: 2.5%).
AREIT – CIMB
Ascending the ranks
• Portfolio reaches S$4.1bn, record occupancy levels of 98.7%. Revaluation gains of S$483.6m and additions from acquisitions, completed development projects and asset enhancements valued at S$290.6m expanded A-REIT’s portfolio to S$4.1bn in FY08. Record occupancy levels of 98.7% were achieved as at 31 Dec 07.
• Large supply in the pipeline; 59% pre-committed. Industrial supply in the pipeline is significant over 2008-09. However, with 59% of the pipeline already pre-committed, demand from the manufacturing sector and office users is likely to be sufficient to absorb the remaining supply. The outlook for industrial rents is positive, with rents likely to rise by up to 15% yoy in 2008.
• Upgrading DPU forecasts; target price raised to S$2.99 from S$2.60. We raise our FY08-10 DPU forecasts by 0.3-11.8% on higher yield assumptions for development projects and higher rental growth assumptions. Following this, our DDM-based target price for A-REIT (discount 6.7%) rises to S$2.99. Maintain Outperform.